Bank-NBFC merger rules soon, HDFC first in queue

MUMBAI: The promised consolidation of non-banking finance companies (NBFCs) may hint at an interesting possibility: a merger of HDFC with HDFC Bank. In the policy, the RBI has said that new guidelines will be framed for M&As between private sector banks and NBFCs. While this has scuttled possible plans of NBFCs lobbying to convert themselves into banks, the proposal could be aimed at a much bigger play in the financial services sector. In the past, the merger of some NBFCs with banks had not gone down well with the regulator, as the banks which acquired NBFCs were saddled with bad assets at the end of the exercise. Now with clear guidelines for such mergers to be put in place, mortgage financing firm HDFC — which is technically an NBFC — could be a potential candidate for a merger with HDFC Bank, the private bank it promoted. HDFC, India's largest home loan entity, is categorised as an NBFC. Analysts think that a merger of this scale would make more sense once the government clears the legislation that would pave the way for lower reserve requirements like CRR and SLR. The central bank may favour such mergers, but is unlikely to give regulatory forbearance to the merged entity. The policy says the guidelines would cover the process of merger proposal, determination of swap ratios, disclosures, norms for buying/selling of shares by promoters before and during the merger and the board's involvement in the process. The banking sector regulator has also signalled its intent to move ahead to ensure consolidation among private sector banks, in tune with ownership norms and FDI in them, unveiled on February 28. The plan now is to enter into bank-wise dialogues to ensure a time-bound framework for compliance on ownership and governance of private sector banks. This could force a consolidation drive, especially among the old private sector banks in which foreign banks can now acquire a stake. These guidelines would also be applicable as appropriate to public sector banks, subject to relevant legislation. Not long ago, IndusInd Bank merged with two NBFCs. Almost two years ago, it had reverse-merged IndusInd Enterprises and Finance, a promoter company, with itself. Subsequently, it merged Ashok Leyland Finance with itself. The RBI wanted all the details of the merger of Ashok Leyland Finance with the bank. The valuations for a bank and an NBFC are different as there are other guidelines pertaining to NPA recognition and recovery. The problem arose as there were no guidelines on the merger between a bank and an NBFC. There are around 20 large NBFCs in the country, with balance sheet sizes of more than Rs 1,000 crore. Major NBFCs include Sundaram Finance, Cholamandalam Finance, Mahindra Finance and Bajaj Finance. Bankers feel the new guidelines would mean that the RBI stops issuing fresh banking licences to NBFCs. Kotak Mahindra Bank was the last instance of an NBFC being allowed a makeover as a bank. There is also concern regarding the financial health of banks in a post-merger scenario. Centurion Bank faced a problem after the merger of 20th Century Finance Corporation with the bank. Bank-wise dialogues are likely to spell out opportunities for foreign banks, which can now take stake only in weaker private sector banks. Some regional private sector banks have a smaller equity base and also a high NPA ratio. The move by RBI may force a consolidation among these banks, while also allowing foreign banks to make an entry.

Bank-NBFC merger rules soon, HDFC first in queue

The promised consolidation of non-banking finance companies (NBFCs) may hint at an interesting possibility: a merger of HDFC with HDFC Bank.

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